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The London School of Economics and Political Science

Regional Clustering Through Internet
Networks:
The Case of Web-enabled Entrepreneurial Cluster in China

Boyi Li

A thesis submitted to the Department of Management of the London School of
Economics for the degree of Doctor of Philosophy.

London, September 2014
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Declaration

I certify that the thesis I have presented for examination for the
MPhil/PhD degree of the London School of Economics and Political
Science is solely my own work other than where I have clearly indicated
that it is the work of others (in which case the extent of any work carried
out jointly by me and any other person is clearly identified in it).

The copyright of this thesis rests with the author. Quotation from it is
permitted, provided that full acknowledgement is made. This thesis may
not be reproduced without my prior written consent.

I warrant that this authorisation does not, to the best of my belief,
infringe the rights of any third party.

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Abstract

This research examines the rationale of geographic co-location of entrepreneurs
who do business on internet platforms. Prior research has shown that
entrepreneurs gain valuable synergy benefits from being embedded in industrial
networks. Nevertheless, the advantages of geographic clustering when business is
conducted via the internet are still to be understood. This research aims to
understand how internet-based economic activity interacts with local social
relations and structures, thus seeking to explain the phenomenon of industrial
clustering of internet-enabled entrepreneurial activity. Guided by theories of
relational and institutional embeddedness, we examine the way social relations
are formed online, trace the rationale of local social relations while business is
conducted online, and study the role of major institutional actors that support the
economic activities of the entrepreneurs.

Empirically, this thesis examines two regional clusters of Chinese micro-
entrepreneurs who conduct their business on an e-commerce platform and form
dynamic interpersonal ties with business partners and customers both online and
offline. The method of ethnographic case study is adopted to gain in depth
understanding of the ways various internet networking tools have been
appropriated in business practice in these two cases and the ways local micro-
entrepreneurs build up collaborative networks in geographic place as well as
cyberspace.

The study of Chinese micro-entrepreneurs reveals and substantiates the formation
of a hybrid sociality, whereby economic exchange via the internet and business
conducted by electronic tools are complemented by local social relations and
actively supported by local government and the IT service corporation. This
research also contributes to development policy considerations; it shows that
regions that are usually unattractive to capital and knowledge/talent flows can
gain economic development momentum by entangling the conduct of business on
web platforms with local social institutions.
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ACKNOWLEDGEMENTS

My first and foremost gratitude goes to the supervisor, Professor Chrisanthi
Avgerou, without whom my journey of growing up from a student to a scholar
would have been much more difficult. She has been such a wonderful
intellectual mentor who masters the art of allowing enough academic freedom
for her students while pushing for high quality work (and productivity) at the
same time. I’m also indebted to the excellent academic environment of the
Information Systems and Innovation Group of the LSE, which provided
support reaching far beyond the research scholarship. The confidence of
critical thinking and writing has been gradually gained only by working with
and having everyday dialogues with all the faculty members and fellow PhD
students in this department over the past few years. My special thanks to
Jannis Kallinikos, Shirin Madon, Susan Scott, Edgar Whitley, Will Venters,
Tony Cornford, and Carsten Sørensen for their support and comments on my
work at various stages of the PhD. I am also extremely lucky to be surrounded
by excellent PhD colleagues who not only shared my passion about work, but
also shared the passion about the vibrant LSE life. In particular, I want to
thank Attila Marton, Aaron Martin, Alexksi Aaltonen, Ben Eaton, Jan
Herzhoff, Carrie Paris, Nuno Oliveira, Atta Addo, Kyung Park for their
support and friendship. I am very grateful for the sponsorship of the Great
Britain – China Educational Trust (GBCET). The Chinese PhD Award from
GBCET has been an important success factor for my fieldwork in China. I am
also grateful for the excellent local support from the staff in Alibaba Group,
Taobao.com, Alibaba Research Centre, and the AliPay Company – in
particular, Mr. Song Fei, Mr. Aaron Sheng, Mr. Shan Sugan, and the long list
of “Taobaoers” based in Hangzhou, Yiwu, Dongfeng and other places. Thank
you for introducing me to this wonderland of Chinese e-commerce world.
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Table of Contents
1. Introduction ........................................................................................... 8
1.1 Research Background ............................................................................................. 8
1.2 Research Design ................................................................................................... 15
1.3 Research Question and Potential Contributions ................................................. 20
1.4 Thesis Structure .................................................................................................... 23
2. Literature Review................................................................................. 26
2.1 Defining Network ................................................................................................. 26
2.2 The Logic of Clustering ......................................................................................... 31
2.3 The Roles of Networks in Clusters ....................................................................... 46
2.4 Clusters and the Internet Networks ..................................................................... 48
2.5 Online Sociality – the Logic of Social Media......................................................... 55
3. On Embeddedness Theory .................................................................... 70
3.1 The Origins of Embeddedness Theory ................................................................. 70
3.2 Embeddedness in Cyberspace? ............................................................................ 85
3.3 On Hybrid Sociality – Embeddedness Revisited ................................................. 105
4. Research Methodology ...................................................................... 113
4.1 Introduction ....................................................................................................... 113
4.2 Research Design and Field Experience ............................................................... 115
4.3 Access -- Beyond Gatekeeper ............................................................................ 124
4.4 Participant Observation ..................................................................................... 125
4.5 Data Analysis ...................................................................................................... 128
5. A Tale of Two Regions ........................................................................ 142
5.1 On China ............................................................................................................. 142
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5.2 The World of Taobao: An Evolving Business “Ecosystem” ................................ 151
5.3 Furniture Manufacturing and e-Commerce -- A Rural Development Story ...... 180
5.4 Yiwu City - Embedding Netpreneur’s Local Community .................................... 206
6. Analysis ............................................................................................. 231
6.1 Local Embeddedness .......................................................................................... 232
6.2 Running e-Business: Articulating Online Relations in Managerial Practice ....... 256
6.3 Hybrid Sociality ................................................................................................... 288
7. Conclusion ......................................................................................... 299
7.1 Key Findings and Contribution ........................................................................... 299
7.2 Policy Implications .............................................................................................. 302
7.3 Limitations .......................................................................................................... 304
References ................................................................................................... 307
Appendix A. Data Sources ......................................................................... 330
Appendix B. Services on Taobao Platform ................................................. 333
Appendix C. Taobao’s Credit Grade Scheme.............................................. 334
Appendix D. Excerpts of Original Interview Transcripts (in Chinese) .......... 335
Appendix E. Images of Dongfeng Furniture Cluster ................................... 337
Appendix F. Images of Yiwu’s QingYanLiu Neighbourhood ....................... 343
Appendix G. A Geographic View of Chinese E-Commerce – based on
Alibaba’s Real-time Data .............................................................................. 345
Appendix H. The survey form used to collect basic information of local
netrepreneurs (in Chinese)........................................................................... 346

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List of Tables
Table 3-1 A summary of embddedness theory in addressing economic exchange
problems ............................................................................................................... 73
Table 3-2 Who is Embedded in What? A Review of Perspectives ...................... 80
Table 5-1 A list of Certified Badges on Seller’s Profile Page ............................ 161
Table 5-2 A summary of Dongfeng furniture business cluster in 2011 ............. 192
Table 6-1Managerial Rationalities in Three Domains of Activity ..................... 269
Table 6-2 Interpretive Schemes of Matching Insitution ..................................... 287

List of Figures

Figure 3-1 Hermeneutic Cycles of Human-Machine Symbolic Interaction ....... 100
Figure 3-2 Embeddedness in the Self-Referential Habitat of Data Tokens ....... 102
Figure 3-3 Sense-making and the manufacturing of digital objects on Internet 104
Figure 3-4 Embeddedness as Hybrid Sociality .................................................. 111
Figure 5-1 Geographical distribution of furniture Sector on Taobao 2010 (Data
source: Shu.taobao.com) .................................................................................... 183
Figure 5-2 Yiwu’s location in China .................................................................. 207
Figure 5-3 The location of Yiwu in CRDEZ Region ......................................... 209
Figure 5-4Photo from the “Central Zhejiang Info” November, 2009 ................ 211
Figure 5-5 Key locations in Yiwu ..................................................................... 220
Figure 6-1The Circulation of Information on Taobao Platform ......................... 272
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1. Introduction
1.1 Research Background
The communication infrastructure of the Internet presents new ways of
organizing socio-economic activities. This organizational innovation is
evident when information systems of business corporations (as well as
governments, NGOs or other organizations) help reduce hierarchies and
highlight the horizontal linkages among individuals and divisions (Markus
1983, Orlikowski 1991, Davenport 1993). As a complex, fast-expanding,
decentralized information system, the Internet is essentially an
organizational innovation (Tapscott 1996, Castells 2003), mobilizing and
coordinating the socio-economic activities of individuals, firms, and
governments in a way and a scale we have never seen before. Internet-
based activities develop an emerging form organization loosely defined
as the “network”.

The notion of network, of course, does not refer to the Internet
exclusively. In research literature, exploration of networks as
organizational forms stems from the discontent on neoclassic theories of
market and hierarchy as the generic forms of economic organization
(Granovetter 1985, Powell and DiMaggio 1991). Organizational
sociologists clearly distinguished networks as a new generic
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organizational form, and highlighted the salient features of networks
(Powell 2003). Theorists of evolutionary economics embraced the
diversity of the organizational forms, regarding such diversity as the
indispensable “population” or “genetic pool” for innovation and growth
(Nelson and Winter 1982, Hodgson 2009). Networks, either in the form of
the inter-firm, firm-government cooperative arrangements, or in the form
of social network of personal ties, constitute the essential elements of
such “diversity of species” (Grabher and Stark 1997). Networks have
been widely understood as a particular way of organizing economic
activities long before the dawn of the Internet age.

Attention to the networks has also been given in the field of economic
geography (Becattini 1990, Amin and Thrift 1995, Staber 1996, Cooke
2001). With origins from the theoretical foundations laid by the
sociologists (Burt 1980, Granovetter 1992, Powell and Smith-Doerr 1994),
geographers recognized and highlighted local networks -- either formal
inter-firm networks or informal social ties -- as an essential structure of
spatial organization, which enables as well as restricts the “path-
selection” or “path-dependence” of regional development (Grabher 1993,
Asheim 1996, Saxenian 1999, Asheim 2000, Gordon and McCann 2000,
Nooteboom 2006). A key contribution of the geography literature is the
discussion of the “institutional thickness” that facilitates and supports
regional industrial networks, which constitute the unique sources of
regional competitiveness (Camagni 1991, Morgan 1997, Simme 1997,
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Hotz-Hart, Clark et al. 2000). Following this line of thinking, networks of
firms supported by regional institutional environment, have been
generally recognized, by an interdisciplinary literature, as the modus
operandi of many successful industrial clusters, ranging from the
innovation-intensive clusters of Silicon Valley to the craftsmanship
clusters in the Third Italy regions. For many geographers, industrial
clusters represent the territorial manifestation of network organizations.

However, these views of networks -- either as an organizational genre or
as a territorial distribution of economic activities -- appear insufficient to
grasp the unfolding dynamics of network organizations rising in the
Internet. In recent years, the phenomenal development of platforms of a
wide range of information services and technologies (digital media,
mobile computing, broadband, sensors etc.) provide abundant
possibilities to organize the “virtual togetherness” among people (and
things) in distributed locations or across time. As the communication in
virtual space becomes an integral part of everyday life, the valuable
information, knowledge and cultural influence, traditionally locked within
territory-bounded networks, travel across borders and feed into a
dynamic process of social and economic activities across territories. The
continuous sophistication of cyberspace technologies -- to facilitate the
collection, processing and delivery of information -- renders the face-to-
face conversations less necessary in many aspects of social life. “Being
together” and “personal/common identity” are increasingly mediated and
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